Understanding Stocks

10 UNDERSTANDING STOCKS
Professional Traders
Professional traders use other people’s money (and sometimes their
own) to make investments or trades on behalf of clients. Professionals
include individuals who work for Wall Street brokerages and stock
exchanges, but they also include institutional traders like pension
funds, banks, and mutual fund companies.
There is no doubt that institutional investors that have access to
millions of dollars influence not only individual stocks but the entire
market. Some of these institutions have set up computer programs that
automatically buy or sell stocks when certain prices have been reached.
(On days when the market is up or down hundreds of points, the stock
exchanges limit how much institutional investors can buy or sell.)
If you want to be a professional Wall Street trader, you can also
apply to become a member of one of the exchanges. At current prices,
it will cost you several million dollars to buy a seat on the NYSE, and
all you get for this is the freedom to trade stocks directly on the
exchange floor. (For that kind of money, you’d think they’d let you play
golf and swim! For a few million dollars less, you can trade directly
from the comfort of your own home.) Some people with seats rent them
out to professional traders and thus bring in extra income.
How Wall Street Keeps Score
Wall Street has several ways to keep track of the market. One of the easiest
ways to find out how the market is performing each day is to look
at a newspaper, television, or the Internet. Typically, people look at the
Dow Jones Industrial Average (DJIA), the most popular method of
determining whether the market is up or down for the day.
The Dow Jones Industrial Average
In 1884, a reporter named Charles Dow calculated an average of the
closing prices of 12 railroad stocks; this became known as the Dow